Non-Competition Agreements in Sale Of Nevada LLCs

© Neal A. Klegerman

In Excellence Cmty. Mgmt., LLC v. Gilmore, 131 Nev. Adv. Rep 38 (Nev. 2015) decided June 25, 2015, the Nevada Supreme Court addressed the enforceability  of an employee non-competition agreement  after the sale of a 100% of the membership interest of the LLC which was the employer.    The Court had addressed a similar issue in the corporate context in HD Supply Facilities Maintenance, Ltd. v. Bymoen, 210 P.3d 183 (Nev. 2009).

The law in Nevada as to enforceability of employee non-competition agreements after a corporate transaction may be summarized as follows:

  • Merger–Non-competition agreement remains enforceable.
  • Sale of stock–Non-competition agreement remains enforceable. This result was implicit in HD Supply but made explicit in Excellence Cmty. Mgmt.
  • Sale of Assets—Non-competition agreement not enforceable unless the employee expressly consents or the noncompetition agreement included an express assignability clause which was negotiated at arm’s length for separate consideration. Traffic Control Services, Inc. v. United Rentals Northwest, Inc., 87 P.3d 1054 (Nev. 2004).

In Excellence Cmty. Mgmt.  the Court found that the sale of the LLC membership interests was the effective equivalent to the sale of corporate stock and thus no new entity resulted.  Therefore, the court applied the holding of HD Supply to find that the non-competition clause remains enforceable after the sale of all of the LLC membership interests.

The Court also distinguished the transaction from Traffic Control which it emphasized was limited to asset purchases. The Court explained that the Traffic Control  rule was based on the law of contractual assignments which applies because an entirely different entity is involved, i.e., the acquirer which becomes a new employer.

Although, the issue was not addressed, there should be little doubt that that the Traffic Control rule would be applied to the sale of assets by a Nevada LLC such that the rules should be the same for a corporation and an LLC.

The Excellence Cmty. Mgmt. opinion seems the correct result in light of the existing law as there would seem to be no good reason to distinguish between a corporation or an LLC in this context.

However, as the author of this update pointed out in a an article published after the HD Supply decision, a preferable approach might be to address assignablity of non-competition agreements based on a two part test rather than on the form of the transaction.  The first part of the test would determine if the post-transaction situation would impose enough of an increased burden on the employee to warrant application of the increased burden exception to the general rule that assignment is permitted.  The second part of the test would be assessing the non-competition agreement in light of the post-transaction facts under the public policy parameters applied to any employee non-competition agreement.  See The Effect of A Sale Of Business Transaction On Nevada Noncompetition Agreements, By Neal A. Klegerman, Nevada Lawyer, p. 32 (November 2009). The following is a link to the article  NevLawyer_Nov_2009_Noncompetition_Agreements